At the start of Q2 19, we talked about the importance of getting the 25 bcm y/y storage surplus down so that Q3 19 prices would not be as pressured when injection rates slow and capacity tank tops are reached. We are now starting Q3 19 with European storage still 24.5 bcm higher y/y at 73.8 bcm, meaning storage could fill in the first half of September. This would potentially leave the EU gas market with four weeks before the start of withdrawals and no storage capacity to inject into to help the market balance.
For the rest of this summer, global gas market participants will be seeking storage space for gas. With EU storage filling rapidly, that storage space could come from the US, floating gas storage or, more unusually, Ukraine.
For gas to find space in the US, the LNG arb window between the TTF and Henry Hub must effectively close. The fact that the LNG arb is still open between the US and European markets for the Sep-19 contract highlights the tension between the prompt focus of hubs and the M+2 decision-making of the LNG market. Given that we expect to see considerable and growing pressure on the TTF as we move to the end of the injection season, how such an oversupplied hub will deal with a continued flow of incremental LNG is a challenge.
In terms of floating LNG storage, late June–early July saw news of potential LNG cargo reloads at European terminals. With such low inter-basin spreads, any reloads now could well be looking to take advantage of the contango in the global gas curves. The Aug-19–Nov-19 spread is currently pricing at -2.44 $/mmbtu at the TTF, and the cross-basin seasonal spread would provide -2.89 $/mmbtu. Given these prices—and ninety-day floating storage likely to cost around $1.95 $/mmbtu—either of these contango trades look profitable now.
In terms of Ukrainian storage, Naftogaz announced that it was targeting 20 bcm at the end of injection season, some 3 bcm more y/y. However, that leaves a 10 bcm gap between storage capacity and the Naftogaz storage target, which could be inviting for European gas participants to access. For 2019, Ukrtransgaz launched a ‘custom warehouse’ regime service for its gas storage capacity for international parties, allowing them to store gas in its storage facilities for 1,095 days without paying customs duties provided the stored gas is exported. Given Uktransgaz-published tariffs, we estimate that the cost of entering gas to Ukraine, injecting it, storing it for 180 days, withdrawing it and then exporting it would be around 2.4 $/mmbtu (7 €/MWh). With early July seeing TTF spot-Q1 20 trading around 7.7 €/MWh, the trade is economic. Uktransgaz reported in June that over the first two months of the injection season, about 0.52 bcm of gas had been injected into Ukrainian storage under the custom warehouse arrangements. Taking both Naftogaz targets and international use of Ukraine storage into account, we think Ukraine injections over the summer will add 2–3 bcm to European gas demand over Q3 19.
The TTF has been dragged up in early July on increases in coal and carbon prices, taking the parity fuel switch trigger from 9.8 €/MWh to 11.3 €/MWh by 8 July. We still think the EU power sector will have to provide even higher levels of additional demand for the market to balance, and this means that TTF prices will need to hit that parity fuel-switch trigger as the mean for the Aug-19 and Sep-19 contracts.